FEDERAL COURT OF AUSTRALIA

Australian Securities and Investments Commission v Ostrava Equities Pty Ltd [2016] FCA 1064

ORDERS

THE COURT ORDERS BY CONSENT THAT:

1.    The Court declares that the First Defendant contravened:

(a)    sections 911A and 911B of the Corporations Act 2001 (Cth) (“the Corporations Act”) during the period June 2009 to May 2015 by providing managed discretionary account services to its clients (including Rodney Bonsack, Douglas Lapthorne, Daniel Hoff, Jean Walsh, Richard Stringer, Client BT, Shannon Milligan and William Tobin) without holding an Australian financial services licence or authorisation from the holder of an Australian financial services licence.

(b)    section 941B of the Corporations Act during the period 2009 to May 2015 by providing financial services to at least 26 retail clients (including Rodney Bonsack, Douglas Lapthorne, Daniel Hoff, Jean Walsh and Shannon Milligan) without providing a financial services guide.

(c)    section 942C of the Corporations Act by:

(i)    providing Richard Stringer in February 2014 and William Tobin in 2010 with financial services guides that were not dated as required by s 942C(5); and

(ii)    providing a financial services guide to clients WP and KE in January 2014 that was not dated as required by s 942C(5), did not provide the level of detail required by s 942C(3), and was not worded in a clear, concise and effective manner as required by s 942C(6A);

(d)    sections 946A and 946C of the Corporations Act during the period 2009 to February 2014 by giving personal advice to Rodney Bonsack, Daniel Hoff, Jean Walsh and Shannon Milligan, who were retail clients, without providing a Statement of Advice;

(e)    section 1041G of the Corporations Act by engaging in dishonest conduct in relation to financial products and/or services by:

(i)    during the period July 2012 to June 2015, purporting to charge and recovering unauthorised fees from the PR Associates Super Fund, the Stringer Super Fund and the Milligan Super Fund; and

(ii)    during the period August 2014 to May 2015, overstating the value of the Tobin Super Fund and representing to William Tobin that the value of the Tobin Super Fund’s shareholdings in the Seventh, Ninth and Tenth Defendants represented their purchase price;

(f)    section 1041H of the Corporations Act and s 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”), by engaging in misleading and deceptive conduct, and s 12DB of the ASIC Act, by making false and misleading representations, during the period June 2013 to May 2015 by overstating the value of the PR Associates Super Fund, the Lapthorne Super Fund, the Stringer Super Fund, the Tobin Super Fund and the Gordon Super Fund;

(g)    section 1041H of the Corporations Act and s 12DA of the ASIC Act, by engaging in misleading and deceptive conduct, and s 12DB of the ASIC Act, by making false and misleading representations, by representing to William Tobin in 2010 that it would not invest funds in unlisted investments promoted by the First Defendant;

(h)    section 1041H of the Corporations Act and s 12DA of the ASIC Act by engaging in misleading and deceptive conduct during the period November 2015 to January 2016 by causing funds from the Walsh Super Fund to be transferred to and received by the Eleventh Defendant without the authorisation or consent of Jean Walsh;

(i)    section 29 of the National Consumer Credit Protection Act 2009 (Cth) by lending the sum of $38,000 to client JM in April 2014 and thereby engaging in unlicensed credit activity;

(j)    regulation 7.7.09C of the Corporations Regulations 2001 (Cth) by failing to retain a Statement of Advice provided to clients KW and MT and the MT Superannuation Fund in April 2009; and

(k)    section 286 of the Corporations Act by failing to keep for a period of seven years written financial records that correctly recorded and explained its transactions, financial position and performance and would enable true and fair financial statements to be prepared and audited.

2.    The Court declares that the First Defendant was knowingly concerned in the Fifth Defendant’s contravention of s 961Q of the Corporations Act referred to in paragraph 7(a) below.

3.    The Court declares that the Second Defendant contravened s 911A of the Corporations Act during the period April 2012 to May 2015 by carrying on a financial services business and providing financial services to Douglas Lapthorne, Daniel Hoff, Jean Walsh, Richard Stringer and Shannon Milligan without holding an Australian financial services licence.

4.    The Court declares that the Third Defendant contravened s 952E of the Corporations Act in September 2015 by giving Jean Walsh a defective financial services guide in circumstances where the financial services guide:

(a)    was not dated as required by s 942B(5) of the Corporations Act;

(b)    did not provide the level of detail that a person would reasonably require for the purpose of making a decision whether to acquire financial services from Ostrava Securities as a retail client, as required by s 942B(3) of the Corporations Act;

(c)    was not worded or presented in a clear, concise and effective manner, as required by s 942B(6A) of the Corporations Act.

5.    The Court declares pursuant to s 1317E of the Corporations Act that the Fourth Defendant contravened s 180 of the Corporations Act as a director of the First to Third Defendants during the period 2009 to January 2016 by:

(a)    failing to take reasonable steps to prevent the First Defendant from committing the contraventions referred to above of sections 286, 911A, 911B, 941B; 942C, 946A, 946C, ·1041G and 1041H of the Corporations Act; sections 12DA and 12DB of the ASIC Act; s 29 of the National Consumer Credit Protection Act 2009 (Cth); and regulation 7.7.09C of the Corporations Regulations;

(b)    failing to take reasonable steps to prevent the Second Defendant from committing the contraventions of s 911A of the Corporations Act referred to above; and

(c)    failing to take reasonable steps to prevent the Third Defendant from committing the contravention of s 952E of the Corporations Act referred to above.

6.    The Court declares that the Fifth Defendant contravened:

(a)    sections 911A and 911B of the Corporations Act during the period June 2009 to May 2015 by providing managed discretionary account services to clients of the First Defendant (including Rodney Bonsack, Douglas Lapthorne, Daniel Hoff, Jean Walsh, Richard Stringer, Client BT, Shannon Milligan and William Tobin) without holding an Australian financial services licence or authorisation from the holder of an Australian financial services licence;

(b)    section 941B of the Corporations Act during the period 2009 to May 2015 by providing financial services to at least 26 retail clients (including Rodney Bonsack, Douglas Lapthorne, Daniel Hoff, Jean Walsh and Shannon Milligan) without providing a financial services guide;

(c)    section 942C of the Corporations Act by providing Richard Stringer in February 2014 with an undated financial services guide;

(d)    sections 946A and 946C of the Corporations Act during the period 2009 to February 2014 by giving personal advice to Rodney Bonsack, Daniel Hoff, Jean Walsh and Shannon Milligan, who were retail clients, without providing a Statement of Advice;

(e)    section 1041G of the Corporations Act during the period July 2012 to June 2015 by engaging in dishonest conduct in relation to financial products and/or services by purporting to charge and recovering unauthorised fees from the PR Associates Super Fund, the Stringer Super Fund and the Milligan Super Fund;

(f)    section 1041G of the Act during the period August 2014 to May 2015 by engaging in dishonest conduct in relation to financial products and/or services by overstating the value of the Tobin Super Fund and representing to William Tobin that the value of the Tobin Super Fund’s shareholdings in the Seventh, Ninth and Tenth Defendants represented their purchase price;

(g)    section 1041H of the Corporations Act and s 12DA of the ASIC Act, by engaging in misleading and deceptive conduct, and s 12DB of the ASIC Act, by making false and misleading representations, during the period June 2013 to May 2015 by overstating the value of the PR Associates Super Fund, the Lapthorne Super Fund, the Stringer Super Fund, the Tobin Super Fund and the Gordon Super Fund; and

(h)    section 1041H of the Corporations Act and s 12DA of the ASIC Act during the period November 2015 to January 2016 by engaging in misleading and deceptive conduct by causing funds from the Walsh Super Fund to be transferred to and received by the Eleventh Defendant without the authorisation or consent of Jean Walsh.

7.    The Court declares pursuant to s 1317E of the Corporations Act that the Fifth Defendant contravened:

(a)    section 961Q of the Corporations Act by:

(i)    not acting in the best interests of, and not providing appropriate advice to, Shannon Milligan in February 2014 by advising her to establish a SMSF in contravention of sections 961B and 961G of the Corporations Act in circumstances where it was uneconomic for Ms Milligan to establish and operate an SMSF having regard to the starting balance of the SMSF, the costs likely to be incurred in administering the SMSF and Ms Milligan’s personal financial circumstances; and

(ii)    not acting in the best interests of, and not providing appropriate advice to, three other clients of the First Defendant during the period February 2014 to August 2014 to establish SMSFs in contravention of sections 961B and 961G of the Corporations Act in circumstances where it was uneconomic for those clients to establish and operate an SMSF having regard to the starting balance of the SMSF and the costs likely to be incurred in administering the SMSF;

(b)    section 180 of the Corporations Act as a director of the First Defendant during the period 2009 to January 2016 by:

(i)    providing managed discretionary account services to clients of the First Defendant (including Rodney Bonsack, Douglas Lapthorne, Daniel Hoff, Jean Walsh, Richard Stringer, Client BT, Shannon Milligan and William Tobin) during the period June 2009 to May 2015 without holding an Australian financial services licence or authorisation from the holder of an Australian financial services licence in contravention of sections 911A and 911B of the Corporations Act;

(ii)    providing financial services to at least 26 retail clients (including Rodney Bonsack, Douglas Lapthorne, Daniel Hoff, Jean Walsh and Shannon Milligan) during the period 2009 to May 2015 without providing a financial services guide in contravention of s 941B of the Corporations Act;

(iii)    providing Richard Stringer with an undated financial services guide in February 2014 in contravention of s 942C of the Act;

(iv)    giving personal advice to Rodney Bonsack, Daniel Hoff, Jean Walsh and Shannon Milligan, who were retail clients, during the period 2009 to February 2014 without providing a Statement of Advice in contravention of sections 946A and 946C of the Corporations Act;

(v)    engaging in dishonest conduct in relation to financial products and/or services during the period July 2012 to June 2015 in contravention of s 1041G of the Corporations Act by purporting to charge and recovering unauthorised fees from the PR Associates Super Fund, the Stringer Super Fund and the Milligan Super Fund;

(vi)    engaging in dishonest conduct in relation to financial products and/or services during the period August 2014 to May 2015 in contravention of s 1041G of the Corporations Act by overstating the value of the Tobin Super Fund and representing to William Tobin that the value of the Tobin Super Fund’s shareholdings in the Seventh, Ninth and Tenth Defendants represented their purchase price;

(vii)    engaging in misleading and deceptive conduct in contravention of s 1041H of the Corporations Act and s 12DA of the ASIC Act and making false and misleading representations in contravention of s 12DB of the ASIC Act during the period June 2013 to May 2015 by overstating the value of the PR Associates Super Fund, the Lapthorne Super Fund, the Stringer Super Fund, the Tobin Super Fund and the Gordon Super Fund;

(viii)    engaging in misleading and deceptive conduct in contravention of s 1041H of the Corporations Act and s 12DA of the ASIC Act during the period November 2015 to January 2016 by causing funds from the Walsh Super Fund to be transferred to and received by the Eleventh Defendant without the authorisation or consent of Jean Walsh;

(ix)    not acting in the best interests of, and providing advice that was inappropriate to, Shannon Milligan in February 2014 and clients of the First Defendant between February 2014 and August 2014, in contravention of s 961Q of the Corporations Act;

(x)    failing to keep accurate records relating to its management and conduct of the Gordon Super Fund;

(xi)    charging and withdrawing fees from the Gordon Super Fund between November 2012 and November 2013 without authorisation or permission;

(xii)    selling 220,000 shares in World Reach Limited on behalf of the Lapthorne Super Fund in March 2015 contrary to the express instructions of Douglas and Lynette Lapthorne; and

(xiii)    charging and withdrawing fees from the Hoff Super Fund during the period 8 August 2012 to 31 October 2014 without authorisation or permission of Daniel Hoff or the Hoff Super Fund;

(xiv)    causing funds to be transferred from the SMSF cash management accounts of clients of the First Defendant during the period December 2013 to June 2014 to the Ostrava Fund for the purpose of acquiring shares in CGR and CGO and failing to transfer the shares from the Ostrava Fund to clients of the First Defendant;

(xv)    permitting and failing to take reasonable steps to prevent the First Defendant from committing the contraventions referred to above of sections 286, 911A, 911B, 941B, 942C, 946A, 946C, 1041G and 1041H of the Corporations Act; sections 12DA and 12DB of the ASIC Act; s 29 of the National Consumer Credit Protection Act 2009 (Cth); and regulation 7.7.09C of the Corporations Regulations; and

(xvi)    being knowingly concerned in the First Defendant’s contraventions of sections 286, 911A, 911B, 941B, 942C, 946A, 946C, 1041G and 1041H of the Corporations Act; sections 12DA and 12DB of the ASIC Act; s 29 of the National Consumer Credit Protection Act 2009 (Cth); and regulation 7.7.09C of the Corporations Regulations;

(c)    sections 181 and 182 of the Corporations Act as a director of the First Defendant by:

(i)    purporting to charge and recovering unauthorised fees from the PR Associates Super Fund, the Stringer Super Fund and the Milligan Super Fund during the period July 2012 to June 2015;

(ii)    overstating the value of the PR Associates Super Fund, the Lapthorne Super Fund, the Stringer Super Fund and the Tobin Super Fund during the period August 2013 to May 2015;

(iii)    representing to William Tobin in February 2014 that the value of the Tobin Super Fund’s shareholdings in the Seventh, Ninth and Tenth Defendants represented their purchase price;

(d)    section 182 of the Corporations Act as a director of the First Defendant during the period September 2011 to October 2012 by investing funds from the PR Associates Super Fund, the Lapthorne Super Fund and the Tobin Super Fund in the Ostrava Fund without notifying and obtaining the consent of Rodney Bonsack, Douglas Lapthorne and William Tobin;

(e)    sections 181 and 182 of the Corporations Act as a director of the First and Eleventh Defendants during the period November 2015 to January 2016 by causing funds from the Walsh Super Fund to be transferred to and received by the Eleventh Defendant without the authorisation or consent of Jean Walsh;

(f)    section 180 of the Corporations Act as a director of the Second Defendant during the period April 2012 to May 2015 by:

(i)    permitting and failing to take reasonable steps to prevent the Second Defendant from committing contraventions of s 911A of the Corporations Act; and

(ii)    being knowingly concerned in the Second Defendant’s contraventions of s 911A of the Corporations Act;

(g)    section 180 of the Corporations Act as a director of the Third Defendant in September 2015 by:

(i)    permitting and failing to take reasonable steps to prevent the Third Defendant from committing the contravention of s 952E of the Corporations Act; and

(ii)    being knowingly concerned in the Third Defendant’s contravention of s 952E of the Corporations Act;

(h)    section 180 of the Corporations Act as a director of the Eighth Defendant during the period July 2012 to October 2015 by permitting or failing to prevent the Eighth Defendant from failing to obtain or retain application forms or any other record of consent for the acquisition by shareholders of shares in Prometheus Capital; and

(i)    sections 181 and 182 of the Act as a director of the Eleventh Defendant by causing the Eleventh Defendant to pay $25,000 to the provisional liquidators in November 2015 purportedly in accordance with the terms of a funding deed in circumstances where:

(i)    the funds paid to the provisional liquidators had been transferred to the Eleventh Defendant by clients of the First Defendant; and

(ii)    those clients had not consented to contributing equity to the Eleventh Defendant and were not aware that the Eleventh Defendant had made a payment to the provisional liquidators.

8.    The Court declares that the Eleventh Defendant was involved in contraventions by the First and Fifth Defendants of s 1041H of the Corporations Act and s 12DA of the ASIC Act during the period November 2015 to January 2016 by:

(a)    causing funds from the Walsh Super Fund to be transferred to it without authorisation or consent; and

(b)    receiving funds from the Walsh Super Fund without authorisation or consent.

9.    The First, Second, Third, Sixth, Seventh, Eighth, Ninth, Tenth and Eleventh Defendants be wound up pursuant to ss 461(1)(k) and 464 of the Corporations Act.

10.    Leanne Chesser and Craig Shepard of KordaMentha, Level 24, 333 Collins Street, Melbourne in the State of Victoria be appointed joint and several liquidators for the purposes of winding up the First, Second, Third, Sixth, Seventh, Eighth, Ninth, Tenth and Eleventh Defendants.

11.    The Fourth and Fifth Defendants be restrained for a period of 10 and 20 years respectively, whether by themselves, their servants, agents and employees or otherwise, from:

(a)    carrying on a business related to, concerning or directed to financial products or financial services within the meaning of s 761A of the Corporations Act;

(b)    providing any of the following services:

(i)    providing financial product advice within the meaning of s 761A of the Corporations Act;

(ii)    dealing in financial products within the meaning of s 761A of the Corporations Act;

(c)    in any way holding themselves out as doing the things in (a) or (b) above.

12.    The Fourth Defendant be disqualified pursuant to sections 206C and 206E of the Corporations Act from managing corporations for a period of 7 years.

13.    The Fifth Defendant be disqualified pursuant to sections 206C and 206E of the Corporations Act from managing corporations for a period of 15 years.

14.    Paragraph 3 of the Order dated 18 December 2015 be varied from the date hereof as follows:

(a)    The injunction does not apply to the income derived from the legal practice conducted by the Fourth Defendant; and

(b)    There be no further deductions by the Fourth Defendant for reasonable living expenses from the funds held in trust with Neill Ogge Lawyers, pursuant to paragraph 1 of the Order dated 10 December 2015 whilst the injunction remains in place.

15.    Paragraph 3 of the Order dated 18 December 2015, as varied by paragraph 14 of this Order, is to remain in place until 1 November 2016.

16.    The trial listed for hearing commencing 12 September 2016 (on an estimate of five days) be vacated.

17.    The order of costs against the Plaintiff made on 23 October 2015 be vacated.

18.    No further order, as to costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

DAVIES J:

Introduction

1    This proceeding was commenced by the Australian Securities and Investments Commission (“ASIC”) in April 2015 seeking orders against the First to Fifth Defendants pursuant to s 1323 of the Corporations Act 2001 (Cth) (“the Corporations Act”). The orders were in aid of an investigation which ASIC had commenced pursuant to s 13 of the Australian Securities and Investments Commission Act 2001 (Cth) (“the ASIC Act”) in relation to possible contraventions of the Corporations Act, and the ASIC Act by the Defendants in respect of the provision of financial services in connection with self-managed superannuation funds.

2    In August 2015, ASIC amended its originating process to join the Sixth to Tenth Defendants as parties and sought orders for the winding up of the corporate Defendants and injunctions restraining the Defendants from providing financial services. Orders by consent appointing provisional liquidators to the corporate Defendants (save for the Eleventh Defendant (“Equity Capital Partners”) which was then not a party) and restraining the corporate Defendants and the Fifth Defendant (“Mr Grimm”) from providing financial services were made in October 2015 without admission of any contravention or wrongdoing.

3    In April 2016, ASIC amended its originating process to join Equity Capital Partners as a Defendant and to seek declarations of various contraventions of the Corporations Act and the ASIC Act against the Defendants.

4    In June 2016 an agreed statement of facts and admissions was filed jointly on behalf of ASIC, Ms Ash, Mr Grimm and Equity Capital Partners (the only corporate Defendant that is not in provisional liquidation). On the basis of that agreed statement of facts and admissions (which is Annexure 1 to these reasons), ASIC seeks:

(a)    declarations that the First Defendant (“Ostrava Equities”), the Second Defendant (“Ostrava Asset Management”), the Third Defendant (“Ostrava Securities”), Equity Capital Partners, Ms Ash and Mr Grimm have contravened and/or were involved in contraventions of various provisions of the Corporations Act, the ASIC Act, the National Consumer Credit Protection Act 2009 (Cth) (“the National Consumer Credit Protection Act”) and/or the Corporations Regulations 2001 (Cth) (“Corporations Regulations”);

(b)    the winding up of each of the corporate Defendants;

(c)    injunctions preventing Ms Ash and Mr Grimm from carrying on a financial services business and/or being engaged in the provision of financial services for a period of 10 years and 20 years respectively; and

(d)    the disqualification of Ms Ash and Mr Grimm from managing corporations for a period of 7 years and 15 years respectively.

5    These orders have been consented to by Ms Ash, Mr Grimm and Equity Capital Partners.

the ostrava group

6    The corporate Defendants are all members of the Ostrava group of companies which was established by Mr Grimm. Before turning to the facts and admissions, it is useful to give a broad overview of the Ostrava group’s activities prior to the appointment of the provisional liquidators on 20 October 2015.

7    Ostrava Equities carried on a business of providing financial services in connection with the establishment and administration of self-managed superannuation funds. Ostrava Equities was authorised to provide financial services to retail clients as an authorised representative of Marigold Falconer International Limited (“Marigold Falconer”), an Australian financial services licensee. Ostrava Equities was also an authorised representative of Ostrava Securities and the trustee of the Ostrava Fund, an unregistered managed investment scheme.

8    Ostrava Asset Management acted as administrator and/or investment manager for the self-managed superannuation funds established by clients of Ostrava Equities.

9    Ostrava Securities has held an Australian financial services licence since 22 November 2013. The three authorised representatives of Ostrava Securities are Ms Ash, Mr Grimm and Ostrava Equities.

10    The Sixth Defendant (“Ostrava Wealth Management”) provided administration services to, and received payments from, the accounts of clients of Ostrava Equities.

11    The Eighth Defendant (“Prometheus Capital”) made investments (including on behalf of clients of Ostrava Equities) in listed and unlisted companies and participated in start-ups and venture capital as an unlisted investment company.

12    In February 2015:

(a)    the Seventh Defendant (“Beta Pharmacology”) was incorporated for the purpose of participating in the medicinal cannabis industry;

(b)    the Ninth Defendant (“Thrive Lending”) was incorporated for the primary purpose of conducting a start-up “peer to peer” lending business; and

(c)    the Tenth Defendant (“Trade BTC”) was incorporated for the purpose of providing a start-up “physical” Bitcoin exchange in Melbourne.

13    Equity Capital Partners was recapitalised in or around October or November 2015 (after several years of inactivity) for the purpose of establishing a Bitcoin trading business.

14    Ms Ash is the sole director of Ostrava Equities, a director of Ostrava Securities, and with Mr Grimm a joint director of Ostrava Asset Management. Mr Grimm has admitted that at relevant times he has acted in the position of a director of Ostrava Equities and Ostrava Securities and is therefore a director of those companies as defined in s 9 of the Corporations Act. Mr Grimm is the sole director of Ostrava Wealth Management, Betta Pharmacology, Prometheus Capital, Thrive Lending, Trade BTC and Equity Capital Partners. He is also an authorised representative of Marigold Falconer and Ostrava Securities.

contraventions

15    The following contraventions have been admitted.

Contraventions of s 911A of the Corporations Act by Ostrava Equities and Mr Grimm:

16    During the period June 2009 to May 2015, Ostrava Equities and Mr Grimm provided managed discretionary account services to retail clients by investing in securities on behalf of the self-managed superannuation funds that Ostrava Equities managed for those clients. The provision of managed discretionary account services to those clients involved an arrangement for making financial investments and thereby constituted a dealing in a financial product within the meaning of ss 763A(1)(a) and 766A of the Corporations Act, and the provision of a “financial service” and the carrying on of a “financial services business” for the purposes of s 911A of the Corporations Act. Neither Ostrava Equities nor Mr Grimm held an Australian financial services licence covering the provision of managed discretionary account services and it was admitted that the provision of such services without an Australian financial services licence was a contravention of s 911A(1) of the Corporations Act.

Contraventions of s 911B of the Corporations Act by Ostrava Equities and Mr Grimm:

17    Ostrava Equities and Mr Grimm were authorised representatives of Marigold Falconer and Ostrava Securities but neither Marigold Falconer nor Ostrava Securities were authorised to provide managed discretionary account services and they were prohibited by clause 21 of the Marigold Falconer Australian financial services licence and clause 19 of the Ostrava Securities Australian financial services licence from providing such services. It was admitted that the provision of managed discretionary account services without authorisation was a contravention of s 911B(1) of the Corporations Act.

Contraventions of s 911A of the Corporations Act by Ostrava Asset Management:

18    During the period April 2012 to May 2015, Ostrava Asset Management provided financial services to clients without holding an Australian financial services licence or being an authorised representative of the holder of an Australian financial services licence. It was admitted that the provision of such services without an Australian financial services licence was a contravention of s 911A(1) of the Corporations Act.

Mr Grimm’s knowing involvement in the contraventions of ss 911A and 911B by Ostrava Equities and s 911A by Ostrava Asset Management:

19    Mr Grimm has admitted that he was knowingly concerned in Ostrava Equities’ contraventions of ss 911A and 911B of the Corporations Act and Ostrava Asset Management’s contraventions of s 911A of the Corporations Act.

Contraventions of s 941B of the Corporations Act by Ostrava Equities and Mr Grimm:

20    During the period 2009 to May 2015, Ostrava Equities and Mr Grimm provided financial services to at least 26 retail clients without giving a financial services guide to those clients. The financial services provided included advice in relation to the establishment of self-managed superannuation funds, arranging for the establishment of self-managed superannuation funds, advice in relation to the investments to be made by self-managed superannuation funds and making investments on behalf of self-managed superannuation funds. It was admitted that the provision of financial services to those clients without giving a financial services guide to those clients was a contravention of s 941B of the Corporations Act.

Mr Grimm’s knowing involvement in the contraventions of s 941B by Ostrava Equities:

21    Mr Grimm admitted that he was knowingly concerned in Ostrava Equities’ contraventions of s 941B of the Corporations Act.

Contraventions of s 942C of the Corporations Act by Ostrava Equities and Mr Grimm:

22    Four instances were admitted where Ostrava Equities provided clients with a financial services guide that did not provide the level of detail required by s 942C(3) of the Corporations Act, and/or was not worded in a clear concise and effective manner as required by s  942C(6A) of the Corporations Act and/or were not dated as required by s 942C(5) of the Corporations Act. It was admitted that the failure to provide a financial services guide which contained all the information required by s 942C of the Corporations Act was a contravention of that section.

Mr Grimm’s knowing involvement in the contraventions of s 942C by Ostrava Equities:

23    Mr Grimm admitted that he was knowingly concerned in Ostrava Equities’ contraventions of s 942C of the Corporations Act.

Contravention of s 952E of the Corporations Act by Ostrava Securities:

24    It was admitted that Ostrava Securities provided a client with a financial services guide that failed to provide the level of detail required by s 942B(3), was not worded in a clear concise and effective manner as required by s  942B(6A) of the Corporations Act and was not dated as required by s 942B(5) of the Corporations Act. The giving of a defective financial services guide was a contravention of s 942B and an offence under s 952E of the Corporations Act.

Mr Grimm’s knowing involvement in the contravention of s 952E by Ostrava Securities:

25    Mr Grimm admitted that he was knowingly concerned in Ostrava Securities’ contravention of s 952E of the Corporations Act.

Contraventions of ss 946A and 946C of the Corporations Act by Ostrava Equities and Mr Grimm:

26    During the period 2009 to 2014, Ostrava Equities and Mr Grimm advised four clients to establish a self-managed superannuation fund with Ostrava Equities and/or in relation to the investments to be made by their self-managed superannuation funds without providing Statements of Advice to each client. It was admitted that the failure to provide Statements of Advice was a breach of s 946A and s 946C of the Corporations Act.

Mr Grimm’s knowing involvement in the contraventions of ss 946A and 946C by Ostrava Equities:

27    Mr Grimm has admitted that he was knowingly concerned in Ostrava Equities’ contraventions of those sections.

Contraventions of ss 961B, 961G and 961Q of the Corporations Act by Mr Grimm:

28    Ostrava Equities and Mr Grimm advised nine clients to establish self-managed superannuation funds in circumstances where the rollover balance of each client’s self-managed superannuation fund was less than $50,000. Four of those clients received the advice after 1 July 2013, when ss 961B, 961G and 961Q were inserted into the Corporations Act. It was admitted that it was uneconomic for those clients to establish and operate a self-managed superannuation fund having regard to the starting balance, the cost likely to be incurred in administering such a fund and in the case of one client her personal financial circumstances. It was further admitted that Mr Grimm failed to act in the best interests of those clients as required by s 961B(1) of the Corporations Act and failed to provide those clients with appropriate advice as required by s 961G of the Corporations Act. The contraventions of ss 961B and 961G were also contraventions of s 961Q of the Corporations Act, which is a civil penalty provision.

Ostrava Equities’ knowing involvement in the contravention of s 961Q by Mr Grimm:

29    It was admitted that Mr Grimm provided that advice on behalf of Ostrava Equities. Ostrava Equities was thus knowingly concerned in Mr Grimm’s contraventions of s 961Q of the Corporations Act.

Contraventions of s 1041G of the Corporations Act by Ostrava Equities and Mr Grimm:

30    During the period July 2012 to June 2015, Ostrava Equities and Mr Grimm knowingly charged and recovered unauthorised fees from the self-managed superannuation funds established by three of its clients.

31    During the period August 2014 to May 2015, Mr Grimm and Ostrava Equities knowingly significantly overstated the value of a superannuation fund in client holding statements and in advice given to the client about the value of shareholdings held by the client’s superannuation fund in Beta Pharmacology, Trade BTC and Thrive Lending.

32    It was admitted that Ostrava Equities and Mr Grimm acted dishonestly by doing so and thereby contravened s 1041G of the Corporations Act.

Mr Grimm’s knowing involvement in the contravention of s 1041G by Ostrava Equities:

33    Mr Grimm has admitted that he was knowingly concerned in Ostrava Equities’ contravention of s 1041G of the Corporations Act.

Contraventions of s 1041H of the Corporations Act and ss 12DA and 12DB of the ASIC Act by Ostrava Equities and Mr Grimm:

34    During the period 2010 to January 2016, Mr Grimm and Ostrava Equities:

(a)    gave five clients client holding statements that misrepresented the value of their self-managed superannuation funds by overstating the value;

(b)    misrepresented to a client that Ostrava Equities would not invest funds in unlisted investments promoted by Ostrava Equities; and

(c)    falsely represented to a client that she was required to sign share transfer forms for the purpose of selling shares in order to generate funds needed to pay off a credit card debt, causing funds from a self-managed superannuation fund to be transferred to and received by Equity Capital Partners without the authorisation or consent of the client.

35    It was admitted that this conduct contravened s 1041H(1) of the Corporations Act and ss 12DA(1) and 12DB(1) of the ASIC Act.

Equity Capital Partners was involved in the contraventions of s 1041H of the Corporations Act and ss 12DA and 12 DB of the ASIC Act by Ostrava Equities and Mr Grimm:

36    It was admitted that Equity Capital Partners was involved in the contraventions of s 1041H of the Corporations Act and ss 12DA and 12DB of the ASIC Act by Ostrava Equities.

Mr Grimm’s knowing involvement in the contraventions of s 1041G by Ostrava Equities:

37    Mr Grimm admitted that he was knowingly concerned in Ostrava Equities’ contraventions of s 1041H of the Corporations Act and ss 12DA and 12DB of the ASIC Act.

Contravention of s 286 of the Corporations Act by Ostrava Equities:

38    It was admitted that the books and records kept by Ostrava Equities contained a number of errors, discrepancies and omissions including:

(a)    no records of employment contracts;

(b)    no record of any assets register or depreciation schedule in circumstances where the balance sheet prepared for the FY16 disclosed that Ostrava Equities had an interest in motor car(s) with a book value of $94,007 net of accumulated depreciation;

(c)    no record or account for funds drawn by the directors from the funds of Ostrava Equities for payment of expenses personally incurred by the directors;

(d)    the failure to obtain and retain signed application forms from clients for the acquisition of units in the Ostrava Fund;

(e)    the failure to maintain a unit register in the form required by the trust deed and the failure to provide certificates to unit holders as required by clause 25 of the trust deed of that fund.

39    It was admitted that the failures in record keeping was a contravention of s 286 of the Corporations Act.

Mr Grimm’s knowing involvement in the contravention of s 286 by Ostrava Equities:

40    It was admitted that Mr Grimm was knowingly involved the contravention of s 286 of the Corporations Act by Ostrava Equities

Contravention of s 29 of the National Consumer Credit Protection Act by Ostrava Equities:

41    Ostrava Equities made a loan to a client when it was not licensed or authorised to engage in that credit activity. It was admitted that Ostrava Equities engaged in a “credit activity” within the meaning of that expression as defined in s 6 of the National Consumer Credit Protection Act and by making a loan to a client without holding a licence authorising it to engage in that credit activity, Ostrava Equities contravened s 29(1) of the National Consumer Credit Protection Act.

42    Mr Grimm has admitted that he was involved in that contravention.

Contraventions of regulation 7.7.09C of the Corporations Regulations by Ostrava Equities:

43    Regulation 7.7.09C imposes the requirement that a Statement of Advice must be retained for seven years after the day on which the statement is provided to the client. It was admitted that Ostrava Equities contravened reg 7.7.09C by failing to retain Statements of Advice provided to three clients.

Mr Grimm’s knowing involvement in the contraventions of regulation 7.7.09C by Ostrava Equities:

44    Mr Grimm has admitted that he was involved in those contraventions.

Contraventions of s 180 of the Corporations Act by Ms Ash and Mr Grimm:

45    Mr Grimm admitted the following breaches of directors duties under s 180 of the Corporations Act:

(a)    as a director of Ostrava Equities, Ostrava Asset Management and Ostrava Securities, Mr Grimm was involved in, and failed to take reasonable steps to prevent, the contraventions of each of those companies. Mr Grimm admitted that those contraventions caused the companies’ actual damage and it was reasonably foreseeable that those contraventions would harm the companies’ interests; and

(b)    as a director of Prometheus Capital, Mr Grimm did not cause Prometheus Capital to obtain or retain application forms or any other record of consent for the acquisition by shareholders of shares in Prometheus Capital.

46    Ms Ash admitted that as a director of Ostrava Equities, Ostrava Asset Management and Ostrava Securities, she breached her director’s duties under s 180 of the Corporations Act by failing to take reasonable steps to supervise Mr Grimm and prevent those companies from committing contraventions of the Corporations Act.

Contraventions of ss 181 and 182 of the Corporations Act by Mr Grimm:

47    Mr Grimm admitted that in his capacity as a director of Ostrava Equities he:

(a)    charged and withdrew unauthorised fees from three superannuation funds;

(b)    overstated the value of three superannuation funds in client holding statements; and

(c)    invested funds from three superannuation funds in the Ostrava Fund without notifying and obtaining consent from those clients.

48    By that conduct he breached his duties as a director under s 181 and/or s 182 of the Corporations Act by:

(a)    improperly using his position to gain an advantage for himself or for Ostrava Equities;

(b)    acting for an improper purpose; and

(c)    failing to act in good faith and in the best interest of Ostrava Equities.

49    Mr Grimm admitted that in his capacity as a director of Ostrava Equities and Equity Capital Partners he transferred client funds to Equity Capital Partners without the authorisation or consent of the client and that by this conduct he breached his duties as a director under ss 181 and 182 of the Corporations Act by:

(a)    improperly using his position to gain an advantage for himself or for Equity Capital Partners;

(b)    acting for an improper purpose; and

(c)    failing to act in good faith and in the best interest of Ostrava Equities and Equity Capital Partners.

50    Mr Grimm also admitted that in his capacity as a director of Equity Capital Partners, he caused Equity Capital Partners to pay $25,000 to the provisional liquidators which he warranted were not the subject of any of the claims made by ASIC in this proceeding when those funds had been transferred to Equity Capital Partners from Ostrava Equities without authorisation from the clients and at least some of the money transferred is the subject of claims made by ASIC in this proceeding. He admitted that by this conduct he breached ss 181 and 182 of the Corporations Act by:

(a)    improperly using his position to gain an advantage for himself, Ms Ash the corporate Defendants; and

(b)    failing to act in good faith in the best interests of Equity Capital Partners and for a proper purpose.

declarations

51    The declarations sought by ASIC are within the jurisdiction of the Court (see s 21 of the Federal Court of Australia Act 1976 (Cth) and/or s 1317E of the Corporations Act), Mr Grimm and Ms Ash are proper contradictors because they have an interest in opposing the making of the declarations sought by ASIC (ACCC v MSY Technology Pty Ltd (2012) 201 FCR 378; [2012] FCAFC 56) and it is appropriate to grant the declaratory relief. The declarations have utility as they serve the public interest by identifying the contravening conduct and recording the Court’s disapproval of that contravening conduct.

Injunctions

52    The Court’s power to grant the injunctions which ASIC seeks is conferred by s 1324(1) of the Corporations Act. Section 1324(1) provides as follows:

Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a)    a contravention of this Act; or

(b)    attempting to contravene this Act; or

(c)    aiding, abetting, counselling or procuring a person to contravene this Act; or

(d)    inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or

(e)    being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

(f)    conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.

53    The relevant principles and considerations were addressed by Santow J in ASIC v Adler (2002) 42 ACSR 80; [2002] NSWSC 483 at [56] (“Adler”). That case concerned disqualification orders, but the same principles have been held to apply to restraint orders made under s 1324: Re Idylic Solutions; ASIC v Hobbs (2013) 93 ACSR 421; [2013] NSWSC 106 at [92]-[106]; ASIC v Activesuper Pty Ltd (in liq) (No 2) (2015) 106 ACSR 302; [2015] FCA 527 at [30]. In Adler Santow J summarised the types of cases that warrant permanent orders or orders for very long periods (25 years), medium periods (of between 7 and 12 years), and the shortest periods (up to 3 years). In relation to the length of injunctions, Santow J at [56] noted the following from the cases decided to that point:

(xiii)    Factors which lead to the imposition of the longest periods of disqualification (that is disqualifications of 25 years or more) were:

    -    large financial losses;

    -    high propensity that defendants may engage in similar activities or conduct;

    -    activities undertaken in fields in which there was potential to do great financial damage such as in management and financial consultancy;

    -    lack of contrition or remorse;

    -    disregard for law and compliance with corporate regulations;

    -    dishonesty and intent to defraud;

    -    previous convictions and contraventions for similar activities.

Australian Securities and Investments Commission v Hutchings; Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd; Australian Securities Commission v Parkes;

(xiv)    In cases in which the period of disqualification ranged from 7-12 years, the factors evident and which lead to the conclusion that these cases were serious though not “worst cases”, included:

    -    serious incompetence and irresponsibility;

    -    substantial loss;

    -    defendants had engaged in deliberate courses of conduct to enrich themselves at others’ expense, but with lesser degrees of dishonesty;

    -    continued, knowing and wilful contraventions of the law and disregard for legal obligations;

    -    lack of contrition or acceptance of responsibility, but as against that, the prospect that the individual may reform;

Australian Securities Commission v Forem-Freeway Enterprises; Australian Securities Commission v Donovan; Australian Securities Commission v Roussi; Re Strikers Management Pty Ltd; Re Gold Coast Holdings Pty Ltd.

….

(xv)    The factors leading to the shortest disqualifications, that is disqualifications for up to 3 years, were:

    -    although the defendants had personally gained from the conduct, they had endeavoured to repay or partially repay the amounts misappropriated;

    -    the defendants had no immediate or discernible future intention to hold a position as manager of a company;

    -    in Donovan’s case, the respondent had expressed remorse and contrition, acted on advice of professionals and hand not contested the proceedings;

Australian Securities Commission v Donovan; Re Tasmanian Spastics Association.

54    Taking these factors into account, the periods of restraint from providing financial services which ASIC, Mr Grimm and Ms Ash have agreed upon, being for a period of 20 years and 10 years respectively, are appropriate in their cases.

55    Mr Grimm admitted to numerous very serious statutory contraventions by the companies of which he was a director and acting as a director, and of knowing involvement in those contraventions and breaches of his duties as a director, including engaging in conduct that was dishonest and using his position as a director of those companies for improper purposes. His conduct was deliberate and in contumelious disregard of the law and statutory requirements. There is evidence that clients have suffered significant losses occasioned by the contravening conduct. Many clients were low income earners without significant funds under management, at least nine clients were advised to establish a self-managed superannuation fund where it was uneconomic for them and in the case of four clients, they made contributions that exceeded the closing or most recent value of the superannuation fund after fees and payments deducted by the Defendants. Mr Grimm engaged in deliberate courses of conduct to enrich himself and the corporate group that he established at others’ expense. Another weighty factor that I take into account is that Mr Grimm was acting as a director during a period when he was disqualified from doing so by reason that he was bankrupt. He has since taken responsibility for his conduct and actions by admitting to the contraventions, but the serious nature of many of the contraventions justifies a lengthy period of restraint from carrying on a business of, and providing, financial services.

56    Ms Ash admitted to fewer contraventions of the Corporations Act and no allegation of dishonesty has been made or admitted by her. It is relevant however that Ms Ash is a qualified lawyer and was employed by ASIC within the Enforcement Team between 2000 and 2009, including as team leader. Her qualifications and professional experience put her in the position where she either knew, or ought to have known, the standard of conduct required by law but she appears to have relied passively on Mr Grimm in the carrying on of the financial services business without proper supervision or exercising any independent or critical judgment as a director. In assessing the appropriateness of the agreed period of restraint I attach considerable weight to Ms Ash’s position as a director and her professional experience. The term of the restraint agreed upon is justified in her case, albeit recognising that she also has taken responsibility by admitting her part in the contraventions.

Disqualification orders

57    The Court has the power pursuant to s 206E of the Corporations Act to disqualify a person from managing corporations for a period that the Court considers appropriate if the person has been an officer of a company which has twice contravened the Corporations Act and, on each occasion, the person failed to take reasonable steps to prevent the contravention: s 206E(1)(a)(i); ASIC v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; [2002] NSWSC 310, at [102]; ASIC v Maxwell (2006) 59 ACSR 373; [2006] NSWSC 1052 at [124]; ASIC v Axis International Management Pty Ltd (No 6) (2011) 84 ACSR 703; [2011] FCA 811 at [6], [7], [18] and [19]; and Re Vault Market Pty Ltd [2014] NSWSC 1641, at [67], [88]; ASIC v Astra Resources Ltd (No 2) (2016) 113 ACSR 162; [2016] FCA 560 at [72].

58    In addition to s 206E(1), the Court has the power to impose disqualification orders on Mr Grimm and Ms Ash pursuant to s 206C of the Corporations Act given that Mr Grimm and Ms Ash have admitted to contraventions of s 180 of the Corporations Act and Mr Grimm admitted to contraventions of ss 181 and 182 of the Corporations Act, which are civil penalty provisions.

59    In Adler, Santow J set out the principles applicable to making a disqualification order. These were recently restated by Gordon J in Registrar of Aboriginal and Torres Strait Islander Corporations v Murray [2015] FCA 346 at [220] as follows:

(1)    Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards.

(2)    Disqualification orders are designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office.

(3)    Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors.

(4)    A disqualification order is protective against present and future misuse of the corporate structure.

(5)    The order has a motive of personal deterrence, though it is not punitive.

(6)    The objects of general deterrence are also sought to be achieved.

(7)    In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company.

(8)    Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty.

(9)    In assessing the appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public.

(10)    It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct.

(11)    A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming.

(12)    The eight criteria to govern the exercise of the court’s powers of disqualification set out in Commissioner for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 are influential. The criteria were character of the offenders, nature of the breaches, structure of the companies and the nature of their business, interests of shareholders, creditors and employees, risks to others from the continuation of offenders as company directors, honesty and competence of offenders, hardship to offenders and their personal and commercial interests and offenders’ appreciation that future breaches could result in future proceedings.

(13)    Factors which lead to the imposition of the longest periods of disqualification (of 25 years or more), were large financial losses, high propensity that defendants may engage in similar activities or conduct, activities undertaken in fields in which there was potential to do great financial damage, lack of contrition or remorse, disregard for law and compliance with corporate regulations, dishonesty and intent to defraud and previous convictions and contraventions for similar activities.

(14)    In cases in which the period of disqualification ranged from 7 to 12 years, the factors included serious incompetence and irresponsibility, substantial loss, defendants had engaged in deliberate courses of conduct to enrich themselves at others’ expense, but with lesser degrees of dishonesty, continued, knowing and wilful contraventions of the law and disregard for legal obligations and lack of contrition or acceptance of responsibility, but as against that, the prospect that the individual may reform.

(15)    The factors leading to the shortest disqualifications, that is disqualification for up to three years, were although the defendants had personally gained from the conduct, they had endeavoured to repay or partially repay the amounts misappropriated, the defendants had no immediate or discernible future intention to hold a position as manager of a company and the defendant had expressed remorse and contrition, acted on the advice of professionals and had not contested the proceedings.

60    In this case, a number of those matters are pertinent in considering the period of disqualification. The elements of protection of the public and personal deterrence are particularly relevant given the numerous serious contraventions and in the case of Mr Grimm, and admission of actual dishonesty on his behalf. For the same reasons that lengthy terms of restraint from carrying on a business of, and providing, financial services are justified, I consider that the periods of disqualification of Ms Ash and Mr Grimm from managing corporations which they have agreed to, being for a period of seven years and fifteen years respectively, are appropriate. In so concluding I take into account that Mr Grimm and Ms Ash have admitted the contravening conduct which is a mitigating factor in respect of the length of disqualification that should be imposed.

Winding up

61    ASIC also seeks the winding up of the corporate Defendants on just and equitable grounds under ss 461(1)(k) and 464 of the Corporations Act. The winding up orders have been consented to by Mr Grimm and Ms Ash and Equity Capital Partners. There is little doubt in the present case that winding up orders should be made. There is a justified lack of confidence in the conduct and management of the companies’ affairs such as to give rise to a real risk to the public interest that warrants protection: ASIC v Bilkurra Investments Pty Ltd [2016] FCA 371 at [55]; ASIC v Activesuper Pty Ltd (No 2) (2013) 93 ACSR 189; [2013] FCA 234 at [20]. No evidence has been led concerning the solvency of the companies, but I do not consider that solvency in this case is a factor that would point against a winding up order on the just and equitable ground. Even if the companies are solvent, on the findings made, there has been serious and substantial misconduct and mismanagement in the affairs of the companies and having regard to the nature and extent of the contraventions, the order is justified in order to prevent and condemn the repeated breaches of the law: ASIC v Sino Australia Oil & Gas Ltd [2016] FCA 201 at [24]; ASIC v Planet Platinum [2015] VSC 682. Public interest considerations justify the intervention for investor protection circumstances where there has been repeated breaches of the law: ASIC v Finchley Central Funds Management Ltd [2009] FCA 1110 at [3]; ASIC v Chase Capital (2001) 36 ACSR 778; [2001] WASC 27 at [75].

Conclusion

62    The declarations and other orders sought by ASIC will be made.

Associate:

Dated:    1 September 2016

ANNEXURE 1

SCHEDULE OF PARTIES